UK & EU Market Commentary: Profit taking sends indices lower by 1% – defensives sought

<p>Investors turned to profit taking and diversifying their risk after European indices such as the DAX hit a seven-month high at the end of last […]</p>

Investors turned to profit taking and diversifying their risk after European indices such as the DAX hit a seven-month high at the end of last week and the FTSE failed to rally above the 6000 level. The risk off mode of investors has forced indices lower by a heavy 1% on Tuesday, with financial stocks and the miners taking the brunt of the falls.

By noon the FTSE 100 had fallen 70 points or 1.2% whilst the DAX fell 1.4% and the CAC lost 0.7%.

The FTSEurofirst 300 Index, which tracks the largest 300 capitalised companies in Europe, hit technical resistance at the 1110 level, whilst the FTSE 100’s stubborn failure to push out beyond its two-month range to trade above the 6000 level is leaving traders somewhat uninspired.

An update from key miner BHP Billiton has also raised concerns of softening Chinese resource demand and this has weighed on heavyweight mining stocks and boosted the risk of investor’s attitude today. BHP said it saw evidence of flattening iron ore demand from China, which may not necessarily be too big a surprise considering the reduction in growth target for China from 8% to 7.5% this year. However, any rhetoric that affirms softening growth and subsequent weaker resource demand out of China has triggered a negative reaction in mining stock demand and we have seen more evidence of this today.

Defensive stocks have been sought as investors attempt to diversify the amount of risky stocks they have picked up since December last year, with Vodafone in well demand, seeing its shares rally 1.4%. Tesco and Morrison Supermarket shares have also seen demand on the back of speculation that George Osbourne may announce in tomorrow’s budget a suspension of the limit on Sunday trading hours for Britain’s largest retailers during the Olympics, which could help major retailers to capitalise on the increase in demand for goods.

The past two months has seen bargain hunters enter the market during any small sell off of the FTSE 100 and so it will be important for the FTSE’s near term upward trajectory that bargain hunters make their move if the FTSE trades around the 5840 level. A failure here could see a re-visit of the March lows to the 5750, which is a key support level. A further failure here could indicate a larger correction looming for UK listed stocks.

UK inflation slows less sharply than expected
UK inflation fell less sharply than expected last month, falling on an annual basis from 3.6% to 3.4% when a fall to 3.3% had been expected. The move saw UK inflation fall to its lowest level since November 2010.

Whilst it may be somewhat disappointing to see the fall in inflation miss target, the drop remains a welcome one whilst the speed of the fall was unlikely to continue at the same pace as it has done having hit 5.2% in September last year. The downward momentum on inflation still confirms the Bank of England’s forecasts that inflation will continue to subside this year.

The pound sterling was rather un-reactive against the US dollar on the back of the inflation number.

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